The recent highly publicized decision in the Securities and Exchange Commission (SEC) case against Ripple has been hailed by many as a significant victory against the SEC and Chairman Gary Gensler.
However, former SEC attorney John Reed Stark offers a cautionary perspective, highlighting the ruling’s shaky ground and the likelihood of an appeal that could potentially result in a reversal.
As the crypto community celebrates, Stark challenges the prevailing narrative surrounding the ruling, underscoring the complexities and uncertainties that lie ahead.
The court ruling on the Ripple case categorized the company’s offering of securities into three distinct categories: institutional sales, programmatic sales, and other sales. Each category’s ruling holds critical implications for Ripple and its investors.
Institutional Sales: The court deemed Ripple’s sale of XRP to sophisticated individuals and entities a violation of securities laws, classifying XRP as a security during these transactions. This decision entitles investors to rescission and imposes penalties on Ripple.
Additionally, the court rejected Ripple’s attempt to redefine the conventional Howey test, introducing a new “Essential Ingredients Test.”
It also dismissed Ripple’s claim that an “investment of money” differs from “merely payment of money” under the Howey framework.
In the case of programmatic sales, where XRP was sold to the public on digital asset exchanges, the court ruled that XRP ceased to be a security once sold anonymously to exchanges. The court concluded that programmatic buyers’ profit expectations were independent of Ripple’s efforts.
John Reed Stark raises several concerns about the Ripple decision, pointing out troubling aspects that warrant attention:
Differential SEC Protection: Stark criticizes the decision’s granting of full SEC protection and remedies to institutional investors while leaving retail investors without any SEC protection, which he considers a backward approach.
Securities Regulations and Token Sales Through Exchanges: He questions the ruling’s implication that securities regulations do not apply if tokens are sold through exchanges, arguing that this contradicts established securities law principles.
Transformation of Tokens from Securities to Non-Securities: Stark finds inconsistency in the court’s decision, seemingly transforming tokens from securities when sold to institutional investors into “not securities” when sold on exchanges, disregarding basic investing principles.
Distinction Between Token Distributions: The court’s differentiation between tokens awarded to employees and third parties raises concerns for Stark, who believes such distributions should be considered compensation and subject to securities laws.
The Ripple case highlights the complexity of crypto-related legal matters. Stark emphasizes that the trial order is a partial summary judgment from a single district court judge, not binding precedent on other courts.
Stark predicts that the SEC will likely appeal the Ripple decision to the 2nd Circuit, where the rulings on “programmatic” and “other sales” may be overturned.
Alternatively, the ruling could set a precedent exempting specific tokens from securities regulations based on investor sophistication and ignorance.
